It looks like an outbreak of rationality has hit BlackBerry (Nasdaq:BBRY), as the company announced on Monday that it had formed a special committee to “explore strategic alternatives” for the struggling handset company. While the company's announcement mentioned options like joint ventures, partnerships, and alliances, shareholders, analysts, and investors are are zeroing in almost exclusively on the possibility of a sale.
If BlackBerry is serious about a sale, it'll happen. I have no doubt that, at the right price, the company can find a buyer willing to take on the not-inconsiderable task of turning around this struggling high-end handset company. The trick is going to be that “at the right price” part. BlackBerry's enterprise value (that is, market capitalization net of cash and debt on the balance sheet) isn't very large, but any buyer is looking at a likely multi-year restructuring/turnaround program that will require capital, compress margins, and offer only uncertain payoffs.
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Forget “Why Now?”, Why Not Sooner?
There isn't an especially glorious history of growth-by-acquisition in the mobile space, as ventures like Sony Ericsson haven't really accomplished all that much. Still, I have to wonder why BlackBerry waited so long to openly consider a sale of the company, as Amazon (Nasdaq:AMZN) was reportedly interested back in 2011 – a time when not only was the Blackberry share price 4x higher, but the business as in considerably better shape.
Now the acquisition of the company looks hardly better than buying a second-hand goldfish. Although revenue was up in the most recent quarter, unit sales were down 13%, the BB10 appears to be on a disappointing launch trajectory and the news about subs has gotten bad enough that the company no longer wants to talk about it with investors.
Making matters worse, what BlackBerry does best (high-end handsets) is looking increasingly less valuable as investors and analysts begin to openly debate the risks that the high-end handset market has peaked. With BlackBerry already out of the top 5 and the company offering a weak apps ecosystem compared to Apple (Nasdaq:AAPL) and Google's (Nasdaq:GOOG) Android, a willingness to sell may have come too late for shareholders to get anything close to top dollar.
Lining Up The Suitors
With earnings season over, you can bet that there will be no shortage of rumors and sell-side reports trying to handicap the potential bidders for BlackBerry. To start with, private equity could very likely play a role – more than one Canada-based investor has declared a willingness or interest to participate, and the company's cash flow streams (even if they are at risk) could appeal to a PE buyer.
Looking at strategic buyers, Amazon is probably the first name on the list. BlackBerry would supposedly prefer to be acquired by a “Google-like” buyer, and Amazon would be the most likely name on the list. There have been rumors for years about Amazon getting into the handset space, and BlackBerry would certain complement and enhance the distribution possibilities of Amazon's existing tablet business. Amazon could also improve the app ecosystem almost overnight, and BlackBerry actually could enhance both Amazon's cloud assets and gross margins.
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After Amazon, it gets foggier. Microsoft (Nasdaq:MSFT) could be a candidate, particularly since management cannot control Nokia's (NYSE:NOK) restructuring efforts and there could be synergies with Microsoft's enterprise software and cloud businesses. On the other hands, the agreement with Nokia is long term in nature and I think there would be a shareholder revolt if Microsoft acquired a struggling player like BlackBerry.
Other companies that have already been prominently mentioned as suitors include Facebook (NYSE:FB), Huawei, Apple, and Google. I'll dismiss Apple and Google right away – there could be some appeal to BBRY's IP, its international distribution, and the ability to use cash locked away overseas, but I don't see the value of those pluses outweighing the cost and risks. With Huawei, it's anybody's guess – they definitely want to move up-market, and they have the resources to do the deal if they want. Last and not least, I think Facebook is an unlikely buyer as well – Facebook may want to monetize its mobile base, but management finally has the business looking good again and I don't know why management would think it can fix BlackBerry (apart from potential hubris).
Last and not least, I'm going to throw out Lenovo (Nasdaq:LNVGY) as a potential suitor. I know Lenovo is usually excluded as a bidder because of the amount of capital it would take to buy BlackBerry, but the two companies' global distribution systems could be quite synergistic, Lenovo wants to enter the North American handset market, and Lenovo understands better than most how to thrive in a business with serious margin pressure. All things considered, I don't think Lenovo does it (unless they can get a bargain-bin price), but I think they're a more credible contender than commonly believed.
The Bottom Line
Investors hoping for a Motorola Mobility-like purchase price are likely to be disappointed, as BlackBerry lacks the IP, tax loss, and divestable non-handset businesses that made Motorola workable to Google even at a headline price of over $12 billion. Moreover, as the drawn-out process of trying to sell Dell (Nasdaq:DELL) has shown, selling a struggling consumer/tech business can take a while. Nevertheless, management's willingness to sell now may very well give investors the best chance of maximizing their stake in this handset company.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.